Federal Reserve Board Press Briefing

Release Date: December 18, 2013

For immediate release

Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

Federal Reserve Board And Interest Rates

It’s the usual, “yeah, but” paragraph.  Labor markets are better – but the unemployment rate is still too high.  Consumers and businesses are spending more, but the housing sector is slowing.  Inflation is lower than the Fed wants – but the long term view is decent. 

Gotta love how economists really take a position.  “Hey Ben, do you like your dinner tonight?”  “The meat is tasty, but it’s overcooked.  The green beans look lovely but they are too salty…”

Employment Numbers And Federal Reserve Board

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

Job Of Federal Reserve Board

The Fed has two stated jobs:  1) Pump money into the economy to keep employment as high as possible and 2) Don’t pump in too much money that causes prices to rise.  They are always trying to balance the two.  The sentence we underlined is key.  The Fed feel like the balancing act between those two things is getting closer to being balanced.

How Federal Reserve Board Acts On Economic News

Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Mortgage Bonds And Federal Reserve Board

This is the big paragraph.  Are you as excited as we are?  This is the “tapering” that has been long talked about.  “Tapering” means that the Fed is going to reduce (taper) the amount of mortgage bonds and Treasury bonds that they buy each month.  They are doing this because they think the patient (the economy) is getting better so the patient needs less medicine (money).  They are only slowing down by $5 billion a month for both mortgages and Treasuries.  (Don’t you wish you could refer to a $5 billion reduction as “only?”)

At first glance – this statement could be scary for bond traders.    Here’s a snapshot of what happened to mortgage bond prices right after the Fed announcement.  You can see that the prices of mortgage bonds plummeted (which would push rates higher) immediately after the announcement.  But – just as fast, prices recovered and, right now, we find that mortgage bond prices are up a little bit.  That’s a good thing.  That means the market is taking the “tapering” news well – at least so far.

Federal Reserve Board Will Be Monitoring Economic And Financial News In Coming Months

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

This is the: “We will do our job and monitor the economy in the coming months,” paragraph.  Thanks Fed!  (We’re still waiting for the time when the paragraph reads something like, “The Committee is taking the next three months off to party in Fort Lauderdale and we don’t expect we’ll so much as pick up the business section of a newspaper…”

Employment Numbers

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

This is similar to prior language.  The Fed is saying here that they are very committed to keeping interest rates low for quite some time.  Partners – that should make you quite happy.

Members Of Federal Reserve Board

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.

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